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Newsletter September 2006

The government has announced that it will proceed with the superannuation reforms foreshadowed in the 2006 Federal Budget. The key changes in the proposed new system are summarised below.  

Simplified Contribution Rules

• Under the new rules, the age-based limits on deductible contributions will be abolished, and a limit on concessional deductible contributions of $50,000 per person per annum will apply from 1 July 2007. These contributions will be taxed in the recipient funds at 15%.
• The new threshold will apply per person, irrespective of the number of employers contributing on behalf of the person. The new rules propose that any additional liability for tax on contributions over $50,000 per annum will be levied on the individual, who would be able to elect for their superannuation fund to release money to pay the tax.
• A transitional period will apply which will allow people aged over 50, in the transitional period to make up to $100,000 of concessional contributions without breaching the $50,000 annual cap. This transitional period will apply in the financial years of 2007/08 to 2011/12. For example, a person who turns 50 on 1 January 2010 will be able to make $100,000 in each of the 2010/11 and 2011/12 financial years.

Undeducted Contributions (UDC)

• The proposed new rules will enforce a cap of $150,000 per annum on undeducted contributions. To accommodate larger contributions, people under age 65 will be allowed to bring forward two years of contributions. For example, a person under age 65 would be able to make $450,000 in the 2007/2008 financial year but will then be unable to make further post-tax contributions for a further two years.
• Exemptions from the UDC cap are the proceeds from the disposal of assets that qualify for the small business capital gains tax (CGT) exemptions, and proceeds from a settlement for an injury resulting in permanent disablement.
• There will be a transitional cap of $1 million for post-tax contributions made between 10 May 2006 and 30 June 2007.
• Excess contributions will be taxed at top marginal rates in the hands of the member, who would be able to elect for their superannuation fund to release money to pay the tax.

Lump Sum and Death Benefits

• From 1 July 2007, all lump sum benefits paid from a taxed source to an individual who is aged 60 or over will be tax-free. There will be no reasonable benefit limits. Lump sum benefits from a taxed source to an individual who is below aged 60 will have two components - an exempt component (which comprises the pre-July 1983 component and will be tax-free) and a taxable component (which will be tax-free up to the low rate threshold of $140,000, and taxed at 15% above the threshold).
• All lump sum death benefit payments will be tax-free if paid to a dependent.

Benefit Payment Rules

• Individuals will have greater flexibility as to how and when to draw down their superannuation in retirement. The requirement for compulsory payment of benefits to superannuation fund members over age 65 who do not meet a work test, and compulsory payment from age 75, has been removed from 10 May 2006.

Self-Employed

• The self-employed will be able to claim a full deduction for their superannuation contributions as well as being eligible for the Government co-contribution for their after-tax contributions.

The following amendments will reduce some of the regulatory burdens on business and will apply in respect of the FBT year starting on 1 April 2007 and all later FBT year;

• increase the minor benefits exemption threshold from less than $100 to less than $300.
• increase the reportable fringe benefits amount threshold from more than $1,000 to more than $2,000.
• increase from $500 to $1,000, the reduction of taxable value that applies to eligible fringe benefits (ie, in-house fringe benefits and airline transport fringe benefits).
• Extend the definition of 'remote', for the purposes of the FBT concessions, where the shortest practicable route involves travel by water.

The Australian Taxation Office has clarified its position on certain medical expenses following recent amendments. Under the amendments the following payments do not qualify for the medical expenses offset;

• cosmetic operations for which no Medicare benefit is payable,
• dental services which are solely cosmetic.

The Australian Taxation Office has noted that the offset is available for the following;

• cosmetic operations for which Medicare benefits are payable,
• cosmetic procedures such as skin grafts for burns patients and reconstructive surgery following accident and trauma,
• dental services such as braces or dentures.